Life Time Group Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements in this discussion and analysis are “forward-looking statements” within the meaning of federal securities regulations. Forward-looking statements in this discussion and analysis include, but are not limited to, our plans, possible or assumed future actions, strategies and prospects, both business and financial, including our financial outlook, events and results of operations. Generally, forward-looking statements are not based on historical facts but instead represent only our current beliefs and assumptions regarding future events. All forward-looking statements are, by nature, subject to risks, uncertainties and other factors. This discussion and analysis does not purport to identify factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements. You should understand that forward-looking statements are not guarantees of performance or results and are preliminary in nature. Statements preceded by, followed by or that otherwise include the words “believe,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may result,” “will result,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may,” and “could” are generally forward-looking in nature and not historical facts. In addition, any statements or information that refer to expectations, beliefs, plans, projections, objectives, performance or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking. The forward-looking statements contained in this discussion and analysis are based on management’s current expectations and are not guarantees of future performance. The forward-looking statements are subject to various risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Actual results may differ materially from these expectations due to numerous factors, many of which are beyond our control, including risks relating to our business operations and competitive and economic environment, risks relating to our brand, risks relating to the growth of our business, risks relating to our technological operations, risks relating to our capital structure, risks relating to our human capital, risks relating to legal compliance and risk management, risks relating to our financial performance and risks relating to ownership of our common stock and the other important factors discussed under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) and as such risk factors may be updated from time to time in our periodic filings with the SEC that are accessible on the SEC’s website at www.sec.gov . Since it is not possible to foresee all such factors, these factors should not be considered as complete or exhaustive. Consequently, we caution investors not to place undue reliance on any forward-looking statements, as no forward-looking statement can be guaranteed, and actual results may vary materially. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. Forward-looking statements speak only as of the date of this report. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Overview Initial Public Offering On October 12, 2021, Life Time Group Holdings, Inc. consummated its initial public offering (“IPO”) of 39.0 million shares of its common stock at a public offering price of $18.00 per share, resulting in total gross proceeds of $702.0 million before deducting the underwriting discounts and other offering expenses. The shares of its common stock began trading on The New York Stock Exchange under the symbol “LTH” on October 7, 2021. A registration statement on Form S-1 relating to the offering of these securities was declared effective by the SEC on October 6, 2021. Additionally, on November 1, 2021, Life Time Group Holdings, Inc. consummated the sale of nearly 1.6 million additional shares of its common stock at the IPO price of $18.00 per share pursuant to the partial exercise by the underwriters of their over-allotment option, resulting in total gross proceeds of approximately $28.4 million before deducting the underwriting discounts and commissions. Business Life Time, the “Healthy Way of Life Company,” is a leading lifestyle brand offering premium health, fitness and wellness experiences to a community of more than 1.4 million individual members, who together comprise more than 775,000 memberships, as of June 30, 2022. Since our founding over 30 years ago, we have sought to continuously innovate ways for our members to lead healthy and happy lives by offering them the best places, programs and performers. We deliver high-quality experiences through our omni-channel physical and digital ecosystem that includes more than 150 centers—distinctive, resort-like athletic country club destinations—across 29 states in the United States and one province in Canada. Our track record of providing differentiated experiences to our members has fueled our strong, long-term financial performance. 22 Table of Contents Our luxurious athletic country clubs, which are located in both affluent suburban and urban locations, total more than 15 million square feet in the aggregate. As of June 30, 2022, we had 19 new centers under construction and we believe we have significant opportunities to continue expanding our portfolio of premium centers with 12 planned new centers for 2022 and 11 or more new centers in 2023 in increasingly affluent markets. We offer ex pansive fitness floors with top-of-the-line equipment, spacious locker rooms, group fitness studios, indoor and outdoor pools and bistros, indoor and outdoor tennis courts, pickleball courts, basketball courts, LifeSpa, LifeCafe and our childcare and Kids Academy learning spaces. Our premium service offerings are delivered by over 39,000 Life Time team members, including over 8,300 fitness professionals, ranging from personal trainers to studio performers. Our members are highly engaged and draw inspiration from the experiences and community we have created. Our center memberships increased from 649,373 at December 31, 2021 to 724,778 at June 30, 2022 as the impact from the COVID-19 pandemic subside d. We have been actively monitoring the macroeconomic environment and its impact on our business, including with respect to inflation, labor and supply chain. The inflation rate has continued to be elevated in 2022, which has had an impact on our expenses in several areas, including wages, construction costs and other operating expenses. These inflationary impacts have resulted in a reduction in our margin performance and an increase in our capital expenditures. We anticipate fiscal year 2022 will continue to be a dynamic macroeconomic environment, including that elevated levels of inflation will persist throughout the remainder of 2022, and we cannot predict with certainty the impact of these headwinds on our business. We remain focused on providing exceptional experiences to our members, while also now focusing on center efficiencies and expense control given our recovery of a significant portion of our center memberships and membership dues. We believe that no other company in the United States delivers the same quality and breadth of health, fitness and wellness experiences that we deliver, which enabled us to consistently grow our annual membership dues and in-center revenue for 20 consecutive years, prior to the impact of the COVID-19 pandemic. We have been focused on returning to consistent annual growth in our membership dues and in-center revenue. For the six months ended June 30, 2022 and 2021, our recurring membership dues and enrollment fees represented 70.2% and 69.9%, respectively, of our total Center revenue, while our in-center revenue, consisting of Life Time Training, LifeCafe, LifeSpa, Life Time Swim and Life Time Kids, among other services, represented 29.8% and 30.1%, respectively, of our total Center revenue. Our average revenue per center membership increased to $1,219 for the six months ended June 30, 2022 compared to $984 for the six months ended June 30, 2021 and $1,084 for the six months ended June 30, 2019 prior to the COVID-19 pandemic, which demonstrate the significant value that our members place on engaging with Life Time. As we delivered and continued to enhance and broaden the premium experiences for our members, we have strategically increased our membership dues across most of our new and existing centers. We believe we can continually refine our pricing as we deliver exceptional experiences and find the optimal balance among the number of memberships per center, the member experience and maximizing our return for each center. We expect average revenue per center membership to continue to increase compared to the same period in prior year as we acquire new members and open new centers in increasingly affluent markets. We offer a variety of convenient month-to-month memberships with no long-term contracts. We define memberships for our centers in two ways: Center memberships and Digital On-hold memberships. A Center membership is defined as one or more adults, plus any juniors under the age of 14. Our base memberships provide individuals general access (with some amenities excluded) to a selected home center and all centers with the same or a lower base monthly dues rate. Our optimized pricing for a Center membership is determined center-by-center based on a variety of factors, including geography, market presence, demographic nature, population density, competition, initial investment in the center and available services and amenities. Digital On-hold memberships do not provide access to our centers and are for those members who want to maintain certain member benefits including our Life Time Digital membership and the right to convert to a Center membership without paying enrollment fees. We continue to evolve our premium lifestyle brand in ways that elevate and broaden our member experiences and allow our members to more easily and regularly integrate health, fitness and wellness into their lives. For example, we are offering new types of Center memberships and communities, including our signature membership that includes unlimited small group training and priority registrations, and our new ARORA community focused on members aged 55 years and older. We are also enhancing our digital platform to deliver a true omni-channel experience for our members. Our Life Time Digital offering delivers live streaming fitness classes, remote goal-based personal training, nutrition and weight loss support and curated award-winning health, fitness and wellness content. In addition, our members are able to purchase a wide variety of equipment, wearables, apparel, beauty products and nutritional supplements via our digital health store. We are continuing to invest in our digital capabilities in order to strengthen our relationships with our members and more comprehensively address their health, fitness and wellness needs so that they can remain engaged and connected with Life Time at any time or place. Elevating our member experiences and delivering a connected and digital environment requires investment in our team members, programs, products, services and centers. These investments may impact our short-term results of operations and cash flows as our investments in our business may be made more quickly than we see the returns on our investments. 23 Table of Contents We are also expanding our “Healthy Way of Life” ecosystem in response to our members’ desire to more holistically integrate health and wellness into every aspect of their daily lives. In 2018, we launched Life Time Work, an asset-light branded co-working model that offers premium work spaces in close proximity to our centers and integrates ergonomic furnishings and promotes a healthy working environment. Life Time Work members also generally receive access to all of our resort-like athletic destinations across the United States and Canada. Additionally, we opened our first Life Time Living location in 2021, another asset-light extension of our “Healthy Way of Life” ecosystem, which offers luxury wellness-oriented residences. As we expand our footprint with new centers and nearby work and living spaces, as well as strengthen our digital capabilities, we expect to continue to grow our omni-channel platform to support the “Healthy Way of Life” journey of our members. Non-GAAP Financial Measures This discussion and analysis includes certain financial measures that are not presented in accordance with the generally accepted accounting principles in the United States (“GAAP”), including Adjusted EBITDA and free cash flow before growth capital expenditures and ratios related thereto. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of the Company’s non-GAAP financial measures to the corresponding GAAP measures should be carefully eva luated. We use Adjusted EBITDA as an important performance metric for the Company. In addition, free cash flow before growth capital expenditures is an important liquidity metric we use to evaluate our ability to make principal payments on our indebtedness and to fund our capital expenditures and working capital requirements. Adjusted EBITDA We define Adjusted EBITDA as net income (loss) before interest expense, net, provision for (benefit from) income taxes and depreciation and amortization, excluding the impact of share-based compensation expense, (gain) loss on sale-leaseback transactions, capital transaction costs, legal settlements, asset impairment, severance and other items that are not indicative of our ongoing operations, including incremental costs related to COVID-19. Management uses Adjusted EBITDA to evaluate the Company’s performance. We believe that Adjusted EBITDA is an important metric for management, investors and analysts as it removes the impact of items that we do not believe are indicative of our core operating performance and allows for consistent comparison of our operating results over time and relative to our peers. We use Adjusted EBITDA to supplement GAAP measures of performance in evaluating the effectiveness of our business strategies, and to establish annual budgets and forecasts. We also use Adjusted EBITDA or variations thereof to establish short-term incentive compensation for management. Free Cash Flow Before Growth Capital Expenditures We define free cash flow before growth capital expenditures as net cash provided by (used in) operating activities less center maintenance capital expenditures and corporate capital expenditures. We believe free cash flow before growth capital expenditures assists investors and analysts in evaluating our liquidity and cash flows, including our ability to make principal payments on our indebtedness and to fund our capital expenditures and working capital requirements. Our management considers free cash flow before growth capital expenditures to be a key indicator of our liquidity and we present this metric to our board of directors. Additionally, we believe free cash flow before growth capital expenditures is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. We also believe that investors, analysts and rating agencies consider free cash flow before growth capital expenditures as a useful means of measuring our ability to make principal payments on our indebtedness and evaluating our liquidity, and management uses this measurement for one or more of these purposes. Adjusted EBITDA and free cash flow before growth capital expenditures should be considered in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. These are not measurements of our financial performance under GAAP and should not be considered as alternatives to net loss or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by (used in) operating activities as a measure of our liquidity and may not be comparable to other similarly titled measures of other businesses. Adjusted EBITDA and free cash flow before growth capital expenditures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our operating results or cash flows as reported under GAAP. Furthermore, we compensate for the limitations described above by relying primarily on our GAAP results and using Adjusted EBITDA and free cash flow before growth capital expenditures only for supplemental purposes. See our condensed consolidated financial statements included elsewhere in this report for our GAAP results. 24 Table of Contents Non-GAAP Measurements and Key Performance Indicators We prepare and analyze various non-GAAP performance metrics and key performance indicators to assess the performance of our business and allocate resources. For more information regarding our non-GAAP performance metrics, see “—Non-GAAP Financial Measures” above. These are not measurements of our financial performance under GAAP and should not be considered as alternatives to any other performance measures derived in accordance with GAAP. Set forth below are certain GAAP and non-GAAP measurements and key performance indicators for the three and six months ended June 30, 2022 and 2021. The following information has been presented consistently for all periods presented. Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 ($ in thousands, except for Average Center revenue per center membership data) Membership Data Center memberships 724,778 657,737 724,778 657,737 Digital On-hold memberships 50,985 101,983 50,985 101,983 Total memberships 775,763 759,720 775,763 759,720 Revenue Data Membership dues and enrollment fees 69.4% 68.6% 70.2% 69.9% In-center revenue 30.6% 31.4% 29.8% 30.1% Total Center revenue 100.0% 100.0% 100.0% 100.0% Membership dues and enrollment fees $ 309,262 $ 217,244 $ 581,178 $ 392,551 In-center revenue 136,620 99,352 246,325 169,139 Total Center revenue $ 445,882 $ 316,596 $ 827,503 $ 561,690 Average Center revenue per center membership (1) $ 639 $ 525 $ 1,219 $ 984 Comparable center sales (2) 36.2% 295.1% 42.4% 16.1% Center Data Net new center openings (3) — 3 2 4 Total centers (end of period) (3) 153 153 153 153 Total center square footage (end of period) (4) 15,300,000 15,000,000 15,300,000 15,000,000 GAAP and Non-GAAP Financial Measures Net loss $ (2,285) $ (76,356) $ (40,251) $ (229,157) Net loss margin (5) (0.5) % (23.6) % (4.7) % (40.0) % Adjusted EBITDA (6) $ 63,096 $ 4,193 $ 103,722 $ (14,754) Adjusted EBITDA margin (6) 13.7 % 1.3 % 12.2 % (2.6) % Center operations expense $ 279,557 $ 218,711 $ 519,130 $ 393,326 Pre-opening expenses (7) $ 2,559 $ 2,111 $ 3,946 $ 4,671 Rent $ 59,989 $ 51,522 $ 115,953 $ 102,039 Non-cash rent expense (open properties) (8) $ 4,547 $ (1,734) $ 5,988 $ (657) Non-cash rent expense (properties under development) (8) $ 5,079 $ 3,630 $ 9,647 $ 6,876 Net cash provided by (used in) operating activities $ 71,263 $ 25,117 $ 80,325 $ (13,039) Free cash flow before growth capital expenditures (9) $ 32,441 $ (6,910) $ (1,853) $ (60,825) 25 Table of Contents (1) We define Average Center revenue per center membership as Center revenue less Digital On-hold revenue, divided by the average number of Center memberships for the period, where the average number of Center memberships for the period is an average derived from dividing the sum of the total Center memberships outstanding at the beginning of the period and at the end of each month during the period by one plus the number of months in each period. (2) We measure the results of our centers based on how long each center has been open as of the most recent measurement period. We include a center, for comparable center sales purposes, beginning on the first day of the 13th full calendar month of the center’s operation, in order to assess the center’s growth rate after one year of operation. (3) Net new center openings are the number of centers that opened for the first time to members during the period, less any centers that closed during the period. Total centers (end of period) is the number of centers operational as of the last day of the period. As of June 30, 2022, all of our 153 centers were open. (4) Total center square footage (end of period) reflects the aggregate fitness square footage, which we use as a metric for evaluating the efficiencies of a center as of the end of the period. The square footage figures exclude areas used for tennis courts, outdoor swimming pools, outdoor play areas and stand-alone Work, Sport and Swim locations. These figures are approximations. (5) Net loss margin is calculated as net loss divided by total revenue. (6) We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net income (loss) before interest expense, net, provision for (benefit from) income taxes and depreciation and amortization, excluding the impact of share-based compensation expense, (gain) loss on sale-leaseback transactions, capital transaction costs, legal settlements, asset impairment, severance and other items that are not indicative of our ongoing operations, including incremental costs related to COVID-19. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by total revenue. The following table provides a reconciliation of net loss, the most directly comparable GAAP measure, to Adjusted EBITDA: Three Months Ended Six Months Ended June 30, June 30, ($ in thousands) 2022 2021 2022 2021 Net loss $ (2,285) $ (76,356) $ (40,251) $ (229,157) Interest expense, net of interest income (a) 27,093 40,078 57,036 136,295 Benefit from income taxes (3,990) (20,933) (6,857) (46,886) Depreciation and amortization 57,173 57,822 115,280 119,028 Share-based compensation expense (b) 5,973 2,881 27,411 2,881 COVID-19 related expenses (c) 371 (486) 583 (188) (Gain) loss on sale-leaseback transactions (d) (21,212) 33 (49,584) 831 Other (e) (27) 1,154 104 2,442 Adjusted EBITDA $ 63,096 $ 4,193 $ 103,722 $ (14,754) (a) For the six months ended June 30, 2021, we incurred a non-cash expense of $41.0 million related to the extinguishment of a related party secured loan and $18.3 million related to the write-off of debt discounts and issuances costs in connection with the extinguishment of our prior term loan facility, senior unsecured notes and the related party secured loan. (b) Shar e-based compensation expense recognized during the three and six months ended June 30, 2022 is associated with stock options, restricted stock and restricted stock units. The majority of the share-based compensation expense recognized during the six months ended June 30, 2022 was associated with awards that were fully vested and became exercisable on April 4, 2022. Shar e-based compensation expense recognized during the three and six months ended June 30, 2021 was associated with restricted stock and restricted stock units. No share-based compensation expense was recognized during the three and six months ended June 30, 2021 related to stock options because the vesting and exercisability of stock options granted by the Company up through June 30, 2021 was contingent upon the occurrence of a change of control or an initial public offering. (c) Represents the incremental net expenses (credits) we recognized related to the COVID-19 pandemic. We adjust for these costs as they do not represent costs associated with our normal ongoing operations. We believe that adjusting for these costs provides a more accurate and consistent representation of our actual operating performance from period to period. For the three and six months ended June 30, 2022, COVID-19 related expenses primarily consisted of legal-related costs in pursuit of our claim against Zurich. For more information regarding this claim, see Note 11, Commitments and Contingencies, to our condensed consolidated financial statements in this report. For the three and six months ended June 30, 2021, COVID-19 related credits primarily consisted of the recovery of certain qualifying expenses recovered under the CARES Act, partially offset by COVID-19 legal-related costs in pursuit of our claim against Zurich. 26 Table of Contents (d) We adjust for the impact of gains or losses on the sale-leaseback of our properties as they do not reflect costs associated with our ongoing operations. For detail on the gain on sale-leaseback transactions in the three and six months ended June 30, 2022, see “Sale-Leaseback Transactions” within Note 7, Leases, to our condensed consolidated financial statements in this report. (e) Includes costs associated with incremental expenses related to a winter storm that resulted in historical freezing temperatures affecting our Texas region and executive level severance in 2021 and other transactions which are unusual and non-recurring in nature. (7) Represents non-capital expenditures associated with opening new centers which are incurred prior to the commencement of a new center opening. The number of centers under construction or development, the types of centers and our costs associated with any particular center opening can vary significantly from period to period. (8) Reflects the non-cash portion of our annual GAAP operating lease expense that is greater or less than the cash operating lease payments. Non-cash rent expense for our open properties represents non-cash expense associated with properties that were operating at the end of each period presented. Non-cash rent expense for our properties under development represents non-cash expense associated with properties that are still under development at the end of each period presented. The negative non-cash rent expense amounts associated with our open properties for the three and six months ended June 30, 2021 reflect deferred rent repayments that we made at various dates throughout each of the respective periods. Beginning in the second quarter of fiscal 2020, due to the disruption caused by the COVID-19 pandemic, we began negotiating lease concessions with many of our landlords. The concessions we were able to obtain from these landlords primarily consisted of full or partial rent payment deferrals, with scheduled repayments due at various dates through December 2021. During the periods in which these rent payments were deferred, we recognized the deferred rent payments as non-cash rent expense. During the periods in which we repaid these deferred rent amounts, we recognized the repayment amounts as both an increase in cash rent expense and a decrease in non-cash rent expense. (9) Free cash flow before growth capital expenditures, a non-GAAP financial measure, is calculated as net cash provided by (used in) operating activities less center maintenance capital expenditures and corporate capital expenditures. The following table provides a reconciliation from net cash provided by (used in) operating activities to free cash flow before growth capital expenditures: Three Months Ended Six Months Ended June 30, June 30, ($ in thousands) 2022 2021 2022 2021 Net cash provided by (used in) operating activities $ 71,263 $ 25,117 $ 80,325 $ (13,039) Center maintenance capital expenditures (19,057) (17,275) (35,453) (24,967) Corporate capital expenditures (19,765) (14,752) (46,725) (22,819) Free cash flow before growth capital expenditures $ 32,441 $ (6,910) $ (1,853) $ (60,825) Factors Affecting the Comparability of our Results of Operations Impact of COVID-19 on our Business Overview In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, the United States declared a National Public Health Emergency and we closed all of our centers based on orders and advisories from federal, state and local governmental authorities regarding COVID-19. Throughout this report, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” when we refer to “COVID-19,” such as when we describe the “impact of COVID-19” on our operations, we mean the coronavirus-related orders issued by governmental authorities affecting our operations and/or the presence of coronavirus in our centers, including COVID-19 positive members or team members. We re-opened our first center on May 8, 2020, and continued to re-open our centers as state and local governmental authorities permitted, subject to operating processes and protocols that we developed in consultation with an epidemiologist (MD/PhD) to provide a healthy and clean environment for our members and team members and to meet various governmental requirements and restrictions. The performance of our centers has improved significantly with that improvement varied depending on various factors, including how early we were able to re-open them, whether we were required to close them again, their geographic location and applicable governmental restrictions. The performance of our 27 Table of Contents centers was also impacted in 2021 as a result of the Delta variant and then again later in 2021 and into 2022 with the Omicron variant. We have experienced a slightly faster recovery in our membership dues revenue compared to our in-center revenue as our centers have re-opened. We expect membership dues revenue to remain a higher percentage of our total revenue in the near term and return to more historical levels over time. We continue to be encouraged by the trend of diminishing negative impacts from COVID-19; however, the full extent of the impact of COVID-19, including any new variants, remains uncertain and is dependent on future developments that cannot be accurately predicted at this time. There may also be developments outside of our control requiring us to adjust our operating plan, including additional required center closures or operating restrictions. Considering this uncertainty, the extent of the impact of COVID-19 on our financial position, results of operations, liquidity and cash flows is uncertain at this time. Operations As of June 30, 2022, all of our 153 centers were open and our total memberships were 775,763, an increase of 2.1% compared to 759,720 at June 30, 2021. Center memberships were 724,778, an increase of 10.2% compared to 657,737 at June 30, 2021. Digital On-hold memberships were 50,985, a decrease of 50.0% compared to 101,983 at June 30, 2021. Prior to the COVID-19 pandemic, Center memberships and Digital On-hold memberships were 870,237 and 84,231, respectively, at June 30, 2019. As the first six months of 2022 have progressed, we have experienced a significant decrease in the COVID-19 related restrictions on our operations. While we are still utilizing certain of the processes we implemented to provide a healthy and clean environment for our members and team members, we are no longer subject to the stricter requirements such as face coverings, vaccine mandates or negative test results. We will continue to monitor governmental orders regarding the operations of our centers, as well as our center operating processes and protocols. Our centers and in-center businesses have been impacted differently based upon considerations such as their geographic location, vaccination rates, impacts of variants, applicable government restrictions and guidance, and team member and member sentiment with respect to our center operating processes and protocols and working in and/or using our centers. While this uneven performance may continue, we are hopeful that as we continue to emerge from the COVID-19 pandemic and more time passes since the restrictive operating requirements have been lifted, our performance will begin to improve across the country and we will continue to see an increase in Center memberships and center utilization. Cash Flows and Liquidity In response to the impact of COVID-19 on our business, we took swift cash management actions to reduce our operating costs and preserve liquidity, including with respect to our employees, corporate and capital structures, capital expenditures, rent obligations, tax benefits and sale-leaseback transactions. Although there is uncertainty related to the full impact of COVID-19 on our financial position, results of operations, liquidity and cash flows, we believe that the combination of our current cash position, our availability under the Revolving Credit Facility, the actions we have taken with respect to our debt and equity and strengthening our balance sheet, as well as the actions we have taken to reduce our cash outflows, leave us well-positioned to manage our business. If our available liquidity were not sufficient to meet our operating and debt service obligations as they come due, we would need to pursue alternative arrangements through additional debt or equity financing to meet our cash requirements. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. We also intend to continue to explore sale-leaseback transactions. During the six months ended June 30, 2022, we completed sale-leaseback transactions associated with four pro perties. On August 5, 2022, we entered into a definitive agreement for the sale-leaseback of five properties with an aggregate sales price of approximately $200.0 million. The closing on this transaction is expected to be completed in early October 2022. We expect to recognize a net gain associated with this sale-leaseback transaction. In addition, we are exploring the potential sale-leaseback of a number of our properties with targeted gross proceeds of approximately $300 million by the end of the year. For more information regarding the sale-leaseback transactions that were consummated during the six months ended June 30, 2022, see Note 7, Leases, to our condensed consolidated financial statements included elsewhere in this report. Investment in Business We have continued to invest in our business to elevate and broaden our member experiences and drive additional revenue per center membership, including introducing new types of memberships, providing concierge-type member services, expanding our omni-channel offerings and improving our in-center services and products. Elevating our member experiences requires investment in our team members, programs, products, services and centers. These investments may 28 Table of Contents impact our short-term results of operations and cash flows as our investments in our business may be made more quickly than we achieve additional revenue per center membership. Impact of Our Asset-light, Flexible Real Estate Strategy on Rent Expense Our asset-light, flexible real estate strategy has allowed us to expand our business by leveraging operating leases and sale-leaseback transactions. Approximately 61% of our centers are now leased, including approximately 94% of our new centers opened within the last five years, versus a predominantly owned real estate strategy prior to 2015. Rent expense, which includes both cash and non-cash rent expense, will continue to increase as we lease more centers and will therefore impact the comparability of our results of operations. The impact of these increases is dependent upon the timing of our centers under development and the center openings and terms of the leases for the new centers or sale-leaseback transactions. Macroeconomic Trends We have been actively monitoring the macroeconomic environment and its impact on our business, including with respect to inflation, labor and supply chain. See “—Overview—Business” for additional information. Share-Based Compensation During the six months ended June 30, 2022, we recognized share-based compensation expense associated with stock options, restricted stock and restricted stock units totaling approximately $27.4 million. The majority of this expense was associated with awards that were fully vested and became exercisable on April 4, 2022. During the six months ended June 30, 2021, we recognized share-based compensation expense associated with restricted stock and restricted stock units totaling approximately $2.9 million. No share-based compensation expense related to stock options was recognized during the six months ended June 30, 2021 , because the vesting and exercisability of stock options granted by the Company up through June 30, 2021 was contingent upon the occurrence of a change of control or an initial public offering. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. In recording transactions and balances resulting from business operations, we use estimates based on the best information available. We revise the recorded estimates when better information is available, facts change or we can determine actual amounts. These revisions can affect operating results. Management has evaluated the development and selection of our critical accounting policies and estimates used in the preparation of the Company’s unaudited condensed consolidated financial statements and related notes and believes these policies to be reasonable and appropriate. Certain of these policies involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are, therefore, discussed as critical. Our most significant estimates and assumptions that materially affect the Company’s unaudited condensed consolidated financial statements involve difficult, subjective or complex judgments which management used while performing goodwill, indefinite-lived intangible and long-lived asset impairment analyses. Given the additional effects from the COVID-19 pandemic, these estimates can be more challenging, and actual results could differ materially from our estimates. More information on all of our significant accounting policies can be found in Note 2, “Summary of Significant Accounting Policies” to our audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC. There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in such Annual Report on Form 10-K. 29 Table of Contents Results of Operations Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 The following table sets forth our condensed consolidated statements of operations data (amounts in thousands) and data as a percentage of total revenue for the three months ended June 30, 2022 and 2021: Three Months Ended June 30, As a Percentage of Total Revenue 2022 2021 2022 2021 Revenue: Center revenue $ 445,882 $ 316,596 96.7 % 98.0 % Other revenue 15,385 6,591 3.3 % 2.0 % Total revenue 461,267 323,187 100.0 % 100.0 % Operating expenses: Center operations 279,557 218,711 60.6 % 67.7 % Rent 59,989 51,522 13.0 % 15.9 % General, administrative and marketing 51,950 43,322 11.3 % 13.4 % Depreciation and amortization 57,173 57,822 12.4 % 17.9 % Other operating (income) expense (8,212) 8,930 (1.8) % 2.8 % Total operating expenses 440,457 380,307 95.5 % 117.7 % Income (loss) from operations 20,810 (57,120) 4.5 % (17.7) % Other (expense) income: Interest expense, net of interest income (27,093) (40,078) (5.9) % (12.4) % Equity in earnings (loss) of affiliate 8 (91) — % — % Total other expense (27,085) (40,169) (5.9) % (12.4) % Loss before income taxes (6,275) (97,289) (1.4) % (30.1) % Benefit from income taxes (3,990) (20,933) (0.9) % (6.5) % Net loss $ (2,285) $ (76,356) (0.5) % (23.6) % Total revenue. The $138.1 million increase in Total revenue for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 reflects the continued improvement of our operations as we emerge from the adverse impacts of COVID-19, as well as pricing initiatives we implemented at the majority of our centers during the second half of 2021, which have resulted in higher average Center membership dues being charged during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. With respect to the $129.3 million increase in Center revenue for the three months ended June 30, 2022 compared to the three months ended June 30, 2021: • 71.2% was from membership dues and enrollment fees, which increased $92.0 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. This increase reflects the improvement in our Center memberships, which increased from 657,737 as of June 30, 2021 to 724,778 as of June 30, 2022, as we emerge from the adverse impacts of COVID-19, as we ll as pricing initiatives we implemented at the majority of our centers d uring the second half of 2021, which have resulted in higher average Center membership dues being charged during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 ; and • 28.8% was from in-center revenue, which increased $37.3 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 . This increase was recognized across all of our primary in-center businesses and reflects the higher utilization of our services by our members as we emerge from the adverse impacts of COVID-19. The $8.8 million increase in Other revenue for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was primarily driven by our athletic events business, as we were able to produce more of our iconic events during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 when COVID-19 restrictions forced the cancellation of some of our events . 30 Table of Contents Center operations expenses . The $60.8 million increase in Center operations expenses for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was driven by increased staffing requirements resulting from our investment in our programs, services and centers and from the increased usage of our centers and services by our members during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, as well as the addition of two new centers during the first quarter of 2022. Rent expense . The $8.5 million increase in Rent expense for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was primarily driven by our taking possession of nine properties since June 30, 2021 for future centers where we started incurring GAAP rent expense, most of which is non-cash, and the sale-leaseback of five centers since June 30, 2021 , two of which occurred during the three months ended June 30, 2022. General, administrative and marketing expenses. The $8.6 million increase in General, administrative and marketing expenses for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was primarily driven by a $3.2 million increase in overhead costs that were primarily labor-related to enhance and broaden our member services and experiences, a $2.3 million increase in share-based compensation expense, a $1.8 million increase in information technology costs, a $1.7 million increase in public company-related expenses and a $1.1 million increase in marketing expenses, partially offset by a $1.5 million net decrease in other expenses. Depreciation and amortization . The $0.6 million decrease in Depreciation and amortization for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 consists of $0.7 million lower depreciation, driven by the timing of sale-leaseback transactions, partially offset by $0.1 million higher amortization, driven by a facility license associated with an outdoor enthusiast and bicycling event that we acquired during the third quarter of 2021 . Other operating (income) expenses . Other operating income for the three months ended June 30, 2022 was $8.2 million, compared to Other operating expenses of $8.9 million for the three months ended June 30, 2021. The $17.1 million change was primarily attributable to the recognition of a gain of $21.3 million on a sale-leaseback transaction associated with two properties that was completed during the three months ended June 30, 2022, partially offset by higher costs associated with our athletic events business as we were able to produce more of our iconic events during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Interest expense, net of interest income . The $13.0 million decrease in Interest expense, net of interest income for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was driven by a lower average level of outstanding borrowings during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 . Benefit from income taxes . The benefit from income taxes was $4.0 million for the three months ended June 30, 2022 as compared to $20.9 million for the three months ended June 30, 2021 . The effective tax rate was 63.6% and 21.5% for those same periods, respectively. The change in benefit from income taxes was primarily attributable to the decrease in our loss before income taxes for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The effective tax rate applied to our pre-tax loss for the three months ended June 30, 2022 is higher than our statutory rate of 21% and reflects a $3.4 million decrease in the valuation allowance associated with certain of our deferred tax assets, partially offset by deductibility limitations associated with executive compensation. Net loss . As a result of the factors described above, net loss decreased by $74.1 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 . 31 Table of Contents Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 The following table sets forth our condensed consolidated statements of operations data (amounts in thousands) and data as a percentage of total revenue for the six months ended June 30, 2022 and 2021: Six Months Ended June 30, As a Percentage of Total Revenue 2022 2021 2022 2021 Revenue: Center revenue $ 827,503 $ 561,690 97.0 % 98.1 % Other revenue 26,018 10,795 3.0 % 1.9 % Total revenue 853,521 572,485 100.0 % 100.0 % Operating expenses: Center operations 519,130 393,326 60.8 % 68.7 % Rent 115,953 102,039 13.6 % 17.8 % General, administrative and marketing 118,511 81,592 13.9 % 14.2 % Depreciation and amortization 115,280 119,028 13.6 % 20.8 % Other operating (income) expense (25,247) 15,864 (3.0) % 2.8 % Total operating expenses 843,627 711,849 98.9 % 124.3 % Income (loss) from operations 9,894 (139,364) 1.1 % (24.3) % Other (expense) income: Interest expense, net of interest income (57,036) (136,295) (6.7) % (23.8) % Equity in earnings (loss) of affiliate 34 (384) — % (0.1) % Total other expense (57,002) (136,679) (6.7) % (23.9) % Loss before income taxes (47,108) (276,043) (5.6) % (48.2) % Benefit from income taxes (6,857) (46,886) (0.9) % (8.2) % Net loss $ (40,251) $ (229,157) (4.7) % (40.0) % Total revenue. The $281.0 million increase in Total revenue for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 reflects the continued improvement of our operations as we emerge from the adverse impacts of COVID-19, as well as pricing initiatives we implemented at the majority of our centers during the second half of 2021, which have resulted in higher average Center membership dues being charged during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. With respect to the $265.8 million increase in Center revenue for the six months ended June 30, 2022 compared to the six months ended June 30, 2021: • 71.0% was from membership dues and enrollment fees, which increased $188.6 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. This increase reflects the improvement in our Center memberships, which increased from 657,737 as of June 30, 2021 to 724,778 as of June 30, 2022, as we emerge from the adverse impacts of COVID-19, as we ll as pricing initiatives we implemented at the majority of our centers d uring the second half of 2021, which have resulted in higher average Center membership dues being charged during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 ; and • 29.0% was from in-center revenue, which increased $77.2 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 . This increase was recognized across all of our primary in-center businesses and reflects the higher utilization of our services by our members as we emerge from the adverse impacts of COVID-19. The $15.2 million increase in Other revenue for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily driven by our athletic events business, as we were able to produce more of our iconic events during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 when COVID-19 restrictions forced the cancellation of some of our events . 32 Table of Contents Center operations expenses . The $125.8 million increase in Center operations expenses for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was driven by increased staffing requirements resulting from our investment in our programs, services and centers and from the increased usage of our centers and services by our members during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, as well as the addition of two new centers during the six months ended June 30, 2022 . Rent expense . The $13.9 million increase in Rent expense for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily driven by our taking possession of nine properties since June 30, 2021 for future centers where we started incurring GAAP rent expense, most of which is non-cash, the timing of the sale-leaseback of two centers that occurred during 2021 and the sale-leaseback of four centers that occurred during the six months ended June 30, 2022. General, administrative and marketing expenses. The $36.9 million increase in General, administrative and marketing expenses for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily driven by a $22.2 million increase in share-based compensation expense, a $7.3 million increase in overhead costs that were primarily labor-related to enhance and broaden our member services and experiences, a $3.5 million increase in public company-related expenses, a $2.9 million increase in information technology costs and a $2.0 million increase in marketing expenses, partially offset by a $1.0 million net decrease in other expenses. Of the $22.2 million increase in share-based compensation expense, $13.0 million was associated with stock options and $9.2 million was associated with restricted stock and restricted awards. No share-based compensation expense related to stock options was recognized during the six months ended June 30, 2021 , because the vesting and exercisability of stock options granted by the Company up through June 30, 2021 was contingent upon the occurrence of a change of control or an initial public offering. Depreciation and amortization . The $3.7 million decrease in Depreciation and amortization for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 consists of $4.1 million lower depreciation, driven by the timing of sale-leaseback transactions, partially offset by $0.4 million higher amortization, driven by a facility license associated with an outdoor enthusiast and bicycling event that we acquired during the third quarter of 2021 . Other operating (income) expenses . Other operating income for the six months ended June 30, 2022 was $25.2 million as compared to Other operating expenses of $15.9 million for the six months ended June 30, 2021. The $41.1 million change was primarily attributable to the recognition of a gain of $49.6 million on a sale-leaseback transaction associated with four properties that was completed during the six months ended June 30, 2022, partially offset by higher costs associated with our athletic events business as we were able to produce more of our iconic events during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. Interest expense, net of interest income . The $79.3 million decrease in Interest expense, net of interest income for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was driven by $41.0 million of non-cash expense that was recognized during the six months ended June 30, 2021 in connection with the conversion of a related-party secured loan into Series A Preferred Stock, write-offs of debt issuance costs and original issuance discount costs totaling $18.3 million that were recognized during the six months ended June 30, 2021 in connection with extinguished debt instruments, as well as a lower average level of outstanding borrowings during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 . Benefit from income taxes . The benefit from income taxes was $6.9 million for the six months ended June 30, 2022 compared to $46.9 million for the six months ended June 30, 2021 . The effective tax rate was 14.6% and 17.0% for those same periods, respectively. The change in benefit from income taxes was primarily attributable to the decrease in our loss before income taxes for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The effective tax rate applied to our pre-tax loss for the six months ended June 30, 2022 is lower than our statutory rate of 21% and reflects deductibility limitations associated with executive compensation. Net loss . As a result of the factors described above, net loss decreased by $188.9 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 . 33 Table of Contents Liquidity and Capital Resources Liquidity Our principal liquidity needs include the development of new centers, debt service and lease requirements, investments in our business and technology and expenditures necessary to maintain and update or enhance our centers and associated fitness equipment and member experiences. We have primarily satisfied our historical liquidity needs with cash flow from operations, drawing on the Revolving Credit Facility and through sale-leaseback transactions. We have taken significant actions to improve our liquidity. During 2021, we refinanced a significant portion of our outstanding debt. For information regarding the refinancing actions we took during 2021, see Note 6, Debt, to our condensed consolidated financial statements in this report. Additionally, we consummated our IPO. During the six months ended June 30, 2022, we completed sale-leaseback transactions associated with four properties. On August 5, 2022, we entered into a definitive agreement for the sale-leaseback of five properties with an aggregate sales price of approximately $200.0 million. The closing on this transaction is expected to be completed in early October 2022. We expect to recognize a net gain associated with this sale-leaseback transaction. In addition, we are exploring the potential sale-leaseback of a number of our properties with targeted gross proceeds of approximately $300 million by the end of the year. Fo r more information regarding the sale-leaseback transactions that were consummated during the six months ended June 30, 2022 , see Note 7, Leases, to our condensed consolidated financial statements included in this report . We believe the steps we have taken to strengthen our balance sheet and to reduce our cash outflows leave us well-positioned to manage our business. As the opportunity arises or as our business needs require, we may seek to raise capital through additional debt financing or through equity financing. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. To date, we have not experienced difficulty accessing the credit and capital markets; however, volatility in these markets, particularly in light of the rising interest rate environment and any continued impacts of COVID-19, may increase costs associated with issuing debt instruments or affect our ability to access those markets, which could have an adverse impact on our ability to raise additional capital, to refinance existing debt and/or to react to changing economic and business conditions. In addition, it is possible that our ability to access the credit and capital markets could be limited at a time when we would like or need to do so. As of June 30, 2022, there were $30.0 million of outstanding borrowings under our Revolving Credit Facility and there were $31.5 million of outstanding letters of credit. As of June 30, 2022, total cash and revolver availability was $474.8 million, consisting of total cash and cash equivalents of $61.3 million and total revolver availability of $413.5 million. The following table sets forth our condensed consolidated statements of cash flows data (in thousands): Six months ended June 30, 2022 2021 Net cash provided by (used in) operating activities $ 80,325 $ (13,039) Net cash used in investing activities (77,702) (89,718) Net cash provided by financing activities 27,139 173,712 Effect of exchange rates on cash and cash equivalents (110) 50 Increase in cash and cash equivalents $ 29,652 $ 71,005 Operating Activities The $93.4 million increase in cash provided by operating activities for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily the result of higher profitability due to the recovery from the impact of COVID-19 on our business. Investing Activities Investing activities consist primarily of purchasing real property, constructing new centers, acquisitions and purchasing new fitness equipment. In addition, we invest in capital expenditures to maintain and update our existing centers. We finance the purchase of our property and equipment through operating cash flows, proceeds from sale-leaseback transactions, construction reimbursements and draws on our Revolving Credit Facility. The $12.0 million decrease in cash used in investing activities for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily driven by a higher amount of proceeds that we received from sale-leaseback transactions during the six months ended June 30, 2022 , partially offset by a higher level of new center construction activity during the six months ended June 30, 2022 . 34 Table of Contents The following schedule reflects capital expenditures by type of expenditure (in thousands): Three Months Ended Six months ended June 30, June 30, 2022 2021 2022 2021 Growth capital expenditures, net of construction reimbursements (1) $ 103,064 $ 46,617 $ 170,462 $ 74,187 Center maintenance capital expenditures 19,057 17,275 35,453 24,967 Corporate capital expenditures 19,765 14,752 46,725 22,819 Total capital expenditures $ 141,886 $ 78,644 $ 252,640 $ 121,973 (1) Growth capital expenditures include new center land and construction, growth initiatives, major remodels of acquired centers and the purchase of previously leased centers. The $130.7 million increase in total capital expenditures for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily driven by higher growth capital expenditures for new centers and corporate capital expenditures related to Life Time Work and continued investments in technology. Financing Activities The $146.6 million decrease in cash provided by financing activities for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily driven by net proceeds we received from borrowings under our Term Loan Facility, Secured Notes and Unsecured Notes during the six months ended June 30, 2021 . We expect to satisfy our short-term and long-term obligations through a combination of cash on hand, funds generated from operations, sale-leaseback transactions and the borrowing capacity available under our Revolving Credit Facility.